Answer to Question #64015 in Economics of Enterprise for Wagh Urs

2016-12-08T15:35:19-0500

Question #64015

suppose exert either low effort or high effort. Low effort is costless and high effort costs $10. The return to effort on the total combined effort. If they both exert low effort then the return is $5 for each. If one exerts low effort and the other high effort then the return is $10 for each. If they both exert high effort then the return is $30 for each.(a) what is net pay (show payoff matrix),(b) tell equilibrium outcome.(c) Is there a prisoners' dilemma?

Expert's answer

2016-12-13T11:34:09-0500

Low effort is costless and high effort costs $10. If they both exert low effort then the return is $5 for each. If one exerts low effort and the other high effort then the return is $10 for each. If they both exert high effort then the return is $30 for each.(a) the payoff matrix will be:1\2 low effort high effortlow effort $5\$5 $10\$0high effort $0\$10 $20\$20(b) The equilibrium outcome is $5 for both with low efforts.(c) There is a prisoners' dilemma, because the equilibrium outcome is not most profitable for both.